Will the Asia Startup Bubble Burst? California Has Clues

Tech stocks in California continue to soar as the race to a billion dollar market cap becomes more achievable. More angel investors and VCs are placing huge bets on extremely early stage companies in order to cash out on a 5 year exit plan. With the rising popularity of convertible notes and other means of discounted options to buy, investors now find it easier to step up to the startup roulette table.

California tech companies need to start acting more responsibly in their activities as to not provoke a world-wide tech bubble collapse. They should serve as the benchmark for startups around the world.

Although not illegal, realtors have been using the tactic of straw-buying for years. Simply, it involves using another’s credit and standing to take out a mortgage for a completely separate buyer. But things get tricky when property-flippers promise high returns while backend transactions happen without proper due-diligence.

History Repeating Itself

The same thing is happening in Asia. A pool of newly minted millionaires is increasing. Meanwhile, startups are attracting heavy-hitting advisory boards. The intention is to leverage their name and reputation to get investment in the company.

Does that sound familiar? Gripping much of East Asia, the 1997 Asian Financial Crisis left the world at the edge of their seats hoping it wouldn’t spread globally, causing a worldwide meltdown.

Nowadays, the continent boasts a majority of the world’s manufacturing and working population. Because of this, Asia simply cannot afford to have any of its industries burst. The world relies on Asia for nearly everything.

From a recent CNBC article,reporter Michelle Loh writes:

“The flood of liquidity puts the region on pace for 45% year-on-year growth”, according to a report by KPMG and venture capital tracker CB Insights. “The region still lags behind the United States’ $19 billion worth of funding. But Asia now attracts slightly over a third of the venture funding available globally,” the report said.

You read that correctly. Asia attracts nearly a third of venture funding available globally! The fitness startup KFit recently raised $3.25 million USD to tackle the problem of finding the right gym to visit. According to a recent article on Techcrunch about the Asia startup:

“KFit is currently operational in six cities across Asia Pacific: Kuala Lumpur, Singapore, Taiwan, Hong Kong, Melbourne and Sydney. The company is aggressive with its growth plans and aims to operate in 20 to 30 cities within the next 18 months” The main KFIT development team is in Kuala Lumpur, Malaysia. The recent round funded by California based Sequoia capital, famous for it’s early investment in the Facebook social networking platform.

Western Economics May Not Apply to Asia Startups

So, what’s really happening in the Asia startup market? The problems being solved are solved in ways which only make sense in Asia. Firms in the US simply cannot address the concerns of consumers in Asian markets.

Who will be at fault if the Asia startup bubble fizzles out, with valuations are forced to go lower and lower? From the CNBC article, cited above:

“Edith Yeung, a Partner at 500 Mobile Collective, a $10 million spin-off from McClure’s 500 Start-ups that focuses on early stage mobile investments, is keen to sound a note of caution.

Yeung says that while tech start-ups might be the “hip thing” at the moment, investors in Asia need to be schooled in the art of patient capital. While “there’s definitely tonnes of talent” in Asia, most start-ups will fail. So investors should not put their money down unless they’re prepared to wait it out, she said.

“It’s highly risky. If you want to get to a point where there’s a good exit, it takes at least 5-10 years.”

About Lee Decker

Lee Decker is a serial entrepreneur who is close to the Silicon Valley start-up scene and is the founder of several successful companies. He lives in California and is InvestAsian's CTO and Start-Up Analyst.